Koppers Holdings Inc (KOP) 2007 Q1 法說會逐字稿

Good morning. My name is [Lawana] and I will be your conference operator today. At this time, I would like to welcome everyone to the Koppers Holdings Inc. first-quarter 2007 results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Snyder, you may begin your conference.

Good morning, everyone. Welcome to our first-quarter conference call. My name is Mike Snyder and I am the Director of Investor Relations for Koppers.

At this time, each of you should have received a copy of our press release. If you haven't, one is available on our Web site, or please call Rose (inaudible) at 412-227-2444 and we can either fax or e-mail you a copy.

Before we get started, I would like to remind all of you that certain comments made during this conference call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the Company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the Company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans, and projected results will be achieved. The Company's actual results could differ materially from such forward-looking statements.

I am joined on this morning's call by Walt Turner, President and CEO of Koppers, and Brian McCurrie, Vice President and CFO. At this time, I would like to turn over the call to Walt Turner. Walt?

Thank you, Mike, and again, welcome to our 2007 first-quarter conference call.

I am very pleased with our first-quarter results. Once again, we've exceeded our expectations, achieving a 21% increase in first-quarter sales to $321 million and adjusted EBITDA growth of 28% to $36.5 million, and basic earnings per share of $0.51. We continue to benefit from strong fundamentals in our core markets, as well as from the contributions from the Reilly transaction which we completed in April of 2006.

Our global Carbon Materials & Chemicals segment first-quarter sales increased 29% to $200 million in 2007 as volumes increased 13%, primarily as a result of contributions from the Reilly transaction and increased sales of distillates. Average prices in the quarter increased 10% due to a higher sales price for carbon materials and products, as a result of higher raw material costs and higher contract pricing. Prices for chemical products were strong as global commodity prices for naphthalene and phthalic and hydride improved, on average, 3% over first-quarter 2006 levels.

Sales of the Railroad & Utility Products in the first quarter were $121 million, an increase of 11% from an unusually higher first quarter of 2006. The key drivers of this growth were higher volumes of (inaudible) treatment services due to unusually higher demand for commercial ties from the short lines and contractors servicing the non-Class 1 railroads. Average prices increased 5% due to mix of volumes shifting to commercial tie orders, as well as improved contract pricing. Although these results are excellent, we do not believe that they are representative of the annual growth rates in the business.

We had a heavy concentration of commercial business in the first quarter that increased sales by approximately $7 million that we do not believe will recur at these levels over the remainder of the year. Although, even absent this, we still had a tremendous quarter in this segment. EBIT margins in this business increased to 10.5% from 7.5% in the first quarter of 2006.

After Brian completes the financial review, I will give you a status update on our critical actions and provide you some insight on what we are expecting through 2007. Brian?

Thanks, Walt. Before I get started, I want to refer everyone to our press release, where we've provided detailed reconciliations between GAAP numbers and the numbers we refer to as adjusted, as well as the nature of the specific adjustments we are making. I'm quite pleased that none of these adjustments relate to the first quarter of 2007.

Sales for the first quarter increased 21% to $321.1 million as compared to $264.6 million for the prior year's first quarter. The increase in sales was a result of higher sales in the Carbon Materials & Chemicals segment, which increased 29% or $44.5 million, and higher sales in the Railroad and Utility segment, which increased 11% or $12 million. The sales increase in the Carbon Materials & Chemicals segment was primarily due to $24.3 million of increased sales from the acquisition of certain assets of Reilly Industries in April of 2006. The remaining sales increase of $20.2 million relates to average price increases of 15.3 million, net of volume decreases of $3.4 million, and a positive foreign exchange impact of $8.3 million.

Price increases include average carbon materials price increases primarily caused by higher raw material costs and annual contract adjustments and higher prices for coal-tar chemicals. Average prices for distillates decreased 1% on lower average prices for carbon black distillates, due to lower prices caused by decreased benchmark oil prices partially offset by higher prices for creosote.

Aggregate average volume decreases before the Reilly transaction include about 4% lower carbon materials volumes, due primarily to lower first-quarter shipments in North America and Europe due to timing of deliveries. This was partially offset by higher distillate volumes.

Coal-tar chemical volumes in the first quarter were relatively flat with lower phthalic and hydride volumes being offset by higher naphthalene volumes. At this point, we believe that, with the exception of phthalic and hydride, all volume reductions relate to timing of deliveries that will normalize as the year progresses. We had anticipated higher uncertainty related to phthalic sales in our guidance for the year and believe that volumes in the first quarter may reflect the general uncertainty related to the North American economy, although these lower volumes have almost entirely to offset by higher-than-anticipated pricing related to orthoxylene.

Sales of Railroad & Utility Products increased 11% in the first quarter to $121.4 million. This $12 million increase was driven by average price increases caused by a change in customer mix and new contracts, about 5%, and an average volume increases across all products of 6%. Volume increases aggregating to $6 million were positively impacted by higher sales of volumes of treated crossties due to significantly increased demand for commercial ties by the non-Class 1 railroads, increases in volumes of treatment services, primarily for the Class 1 railroads, and volume increases for other treated products and chemicals. These increases were partially offset by lower pole volumes that were reduced from 2006 volumes, which were abnormally high due to Hurricane replacement work, lower white-tie volumes that like poles were unseasonably high in the first quarter of 2006, and lower volumes for other treated lumber that included products sold to the railroads for Hurricane relief in 2006. Average price increases of $5.3 million relate to higher prices for commercial treated crossties, treatment service price increases, and distribution pole price increases, partially offset by lower white tie prices due to lower raw material costs.

In the aggregate, sales volumes were positively impacted by both the mix of products sold that shifted to treated ties in the first quarter of 2007 and increased prices related to a renewed contract that was effective February 1, 2007. As Walt mentioned, we believe that sales related to non-Class 1 railroads of approximately $7 million in the first quarter will not recur at those levels as we proceed through the year.

2007 first-quarter EBITDA of $36.5 million compared to 2006 first-quarter adjusted EBITDA of $28.5 million; that excluded $4.5 million of charges. The increase of $8 million or 28% resulted from higher profits in Carbon Materials & Chemicals due to synergies realized from the Reilly transaction, higher margins realized from carbon materials products, and increased Railroad & Utility Products profits due to higher volumes and product mix. These increases were partially offset by higher SG&A spending related to the 2007 global structural changes in the Carbon Materials & Chemicals segment.

Net income for the first quarter was $10.5 million compared to adjusted net income of $5.5 million in the first quarter of 2006, before after-tax charges of $11.5 million. This was due primarily to higher operating profits of $8 million and the lower effective tax rate due to energy tax credits, and the mix of income earned between foreign and domestic entities.

First-quarter basic earnings per share were $0.51 per share compared to adjusted basic earnings per share of $0.27 per share in the first quarter of 2006. Net debt at March 31, 2007 was $460.2 million compared to $451.5 million at December 31, 2006, and reflects our seasonal borrowing patterns and investment in Accounts Receivables and inventories. With interest and pension payments due in the second quarter, we are anticipating an increase in borrowings before they begin to decline towards year-end.

Capital expenditures through the first quarter were $4.8 million compared to $4.6 million in 2006.

At this time, I'd like to turn it back over to Walt.

Thanks, Brian.

With respect to our overall markets and key business drivers, such as the global (technical difficulty) production and North American railroad ties insertions, we continue to maintain a positive outlook well into 2007. Based on (technical difficulty) announcements in these industries have been very positive and cause us to be very optimistic for our prospects in 2007.

Chemical product demands and pricing has remained quite strong for naphthalene. However, we have seen some softening in the demand for phthalic and hydride related most probably to the housing decline and economic uncertainty in the U.S.

The plant expansion of our Australian carbon black plant was completed in early March with full production (inaudible) benefiting the second quarter. This should also allow a substantial portion of the expected benefits of this expansion to positively impact the 2007 results.

Preliminary design of our second joint venture in China is underway. We expect to break ground before the end of this year and are still targeting completion by the end of 2008.

I'm very pleased to tell you that our new raw materials supply contracts in New York that we mentioned at the last call are working quite well and living up to our expectations, providing us with ample coal tar in our European operations.

We did take steps this quarter to implement a new long-term incentive plan for senior management that will award restricted and performance-based awards, as well as options, totaling an estimated 175,000 shares. The three-year plan should more closely align management's interests with those of the shareholders and enhance our ability to retain key executives.

Based on the strong results in the first quarter and what we see as an improved 2007 operating environment and the successful completion of our profit improvement initiatives, we are modifying our 2007 guidance for sales growth of between 7% and 10%, to growth to between 10% and 13%, and adjusted EBITDA growth from 8% to 11% to growth between 11% and 14%.

At this time, I would like to open the meeting up for any questions that anyone may have.

Thank you. (OPERATOR INSTRUCTIONS). Chris Shaw, UBS.

Good quarter, obviously. I guess I will start on the railroad tie business. So, what I guess caused the greater demand from the commercial guys, the short lines and such?

Well, there were a lot of projects going forward, Chris, which were, from what we understand, were actually escalated. There is a tax-relief credit that was enacted back in 2004 that will expire at the end of 2007, based on that tax bill. It really appears that, in order to take advantage of these tax credits, that a lot of these short line and contractor projects wanted to get started and actually get completed before the end of this year. So I think that was the spark of a lot of these accelerated projects that we were fortunately able to take advantage of, having the raw material and obviously the treating facilities to do that.

You don't see any benefit from that for the remainder of the year, or just maybe through the second quarter or something?

Well, I think it's at level, maybe not. It's difficult to see, but the commercial rail sales continues to be fairly strong but again, the first quarter was an unusual situation for us. It's really -- we are really waiting to see if this 45-G tax credit will continue beyond 2007. Various people think it will, but again it hasn't been fully approved yet.

Chris, this is Brian. Just to reemphasize what Walt said, we do see continued strong demand. We just don't see it perhaps at the level of the commercial side that we saw in the first quarter.

Right. Are the services in the treated ties you sell those guys -- are the higher-priced or higher-margin than what you normally sell to class 1 (inaudible)?

Well, typically they are higher margins.

Okay. Also, just curiously, I think you said, maybe in the release, that the weather for getting white ties out was decent out as well? Was that true?

For the first quarter, actually the first two months were fairly decent but March became a little bit of an issue but better than most winters in the past I guess. (multiple speakers)

Okay, because I was expecting it to be pretty wet.

(multiple speakers) Chris, you remember back to 2006, the first quarter was very good due to weather, so I don't know that we saw growth but I think, again, we still see strong demand on these products.

Okay. Just curious -- again you said it was timing on the volumes for carbon materials. Is the sales to the aluminum guys -- is that -- the (inaudible), is that lumpy generally or --?

Well, no, I mean, at times, for instance, and whether it's out of China or out of Australia, we are talking about 5000 to 700 or 8000-ton cargoes. So if you miss a quarter by a day or two, obviously there's timing involved there. Typically, it's not lumpy, to answer your question. No, it's fairly consistent let's say month-over-month, anyway. (inaudible) might have some issues but tank cars, that sort of thing. But the delays were -- I mean, getting power available [into Europe] --.

Yes, I mean, Chris, we had the new raw material contracts coming out of Russia at the end of the year, so we just wanted to make sure, particularly in Europe, that we had those quantities available, so we actually rescheduled some shipments out of the first quarter.

So they can pencil in a really huge second quarter then, right? (LAUGHTER)

I didn't say that. Did you hear that, Walt?

(inaudible)

Good, done! All right. Thanks a lot.

Laurence Alexander, Jefferies & Company.

This is Martha Shelton on behalf of Laurence Alexander. I am just curious if you could comment on the outlook for the distribution pole business for the second half of 2007.

For the second half -- I can talk to you about the first quarter for sure because we mentioned our volume was off when you compare to first quarter of last year. I forget the exact amount but it was off a little bit.

Volumes were down about 20% in the distribution pole business but a lot of that was due to timing for the hurricane order -- sorry, distribution pole-replacement orders we had in 2006 due to hurricane Katrina. This market is still relatively uncertain for us. We haven't given any real specific guidance on our outlook for volumes for the year on this; it's not a huge driver for us. I would say we are probably still waiting with anticipation for this market to improve.

Okay. Then the possibility of prebuying in phthalic and hydride? Could you comment on that?

Prebuying?

We actually had lower volumes on phthalic in the first quarter, so although I think we are still cautious because the linkage of phthalic and hydride to the U.S. economy -- I mean we actually had lower volumes in the first quarter of '07 versus '06.

Okay. Then just perhaps you guys could comment on further consolidation opportunities and how they may affect the (inaudible) deleveraging in 2007.

Well, you know, our position is I think is still the same (inaudible) consolidation. We think there are opportunities out there, globally, that we continue to pursue. So yes, I think it's definitely in our radar. We are continuing to look at potential possibilities of consolidation within the industries we serve.

Okay, thank you.

Mike Harrison, First Analysis.

I had a question on your guidance, at least as it compares to my estimates. If I take into account the strong performance in the first quarter, it seemed to me that it suggests you expect the remainder of the year to be kind of in line with your prior guidance. I was wondering if you could just provide whether you -- you seem to be indicating you expect some slowing, or is this just you being conservative on your outlook? Or you know, relative to the first quarter, what are you expecting for the rest of the year?

Well, you know, we are still very opportunistic out there, and I guess you might call it cautious. Yes, the first quarter was a very good first quarter. I think we would rather see us get through the second quarter here. I mean when you look at the six markets that we are participating in, I think there is still a very strong demand for products globally. You know, there's not any surprises or anything different than what we've talked in the past, but it's -- you know?

Then can you help me understand a little bit how the nonconventional fuel tax credits work? Is that an ongoing part of your business or should we consider that more of a one-time benefit?

Oh, it's ongoing in that it continues through the end of 2009. So, we earned about $5 million a year of tax credits related to our Monessen coke facility. So for the next, what, three years, we will earn about $15 million of tax credits related to that.

Is that something that hits only one time per year or is it quarterly?

No, we are recording it now all the time, every quarter. Last year, because of certain phase-out provisions, we weren't able to record it until the end of the year, weren't able to record all of it until the end of the year. There is legislation at the end of last year that changed that, so we are recognizing it currently in the quarter, in every quarter. It's in our effective tax rate estimate.

Okay, so that 5.5 million for the quarter, that included --?

No, that's 5.5 million for the year, so it's about one-quarter of that that flows to each quarter's effective tax rate.

Okay. Could you give us an update on the litigation that you're involved in, and maybe when you expect to see any activity on that front?

Yes, I mean the main issue is really related to the Grenada litigation. It's still in appeals. There's really, frankly, been very little change from the last call. So I think we had targeted, say, what, 12 months to 18 months for the appeals process, and I'm not aware of anything that would change that.

No.

Other than that, there has not been very dramatic changes on the litigation front for us.

So you expect something to go on maybe in the 9 to 15-months range, then?

Well perhaps (multiple speakers)

Maybe the end of this year, although I think we will probably know more as we get into the second and third quarter, as the appeals process gets further along.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Steve Schwartz, KeyBanc.

Good morning, gentlemen. A couple of questions here -- gross margin. It looks like you were up about 360 basis points on the quarter. Can you break that down into what part of that was the Reilly throughput and what part was pricing, and what was just higher volumes, ex-Reilly?

Are you looking at gross margin or are you looking at EBIT margin?

Gross margin.

Let's see. I mean, that's -- it's not (multiple speakers).

I'm trying to get a feel for what the components are there because it's such a big increase. Then you know the question that comes off of that is, normally, your gross margin percentage goes up throughout the year. So I'm trying to figure out what's going to happen here for you in the second and third quarter.

Yes. You know, Steve, I actually don't have a good answer for your right off the top of my head without doing some breakdown, but clearly, you know, the Reilly transaction did have a positive margin impact for us. I think the mix on the railroad side in the commercial ties had a positive impact for us. The new contract with CSX, although it was effective February 1, did have a positive impact on us. I would say the pricing that we were able to achieve January 1 on some of our new contracts had a positive impact on us. For me, those are really the four main drivers, I think. Now, what the breakdown is I don't have handy and I can talk to you later if you'd like but I would say those are probably the four main drivers for that.

Okay, yes, I will get back with you on that. On the tax rate, if you add back the credits, it looks like your tax rate was about 38%.

Right.

Normally, it runs about 44%, 45%. So going forward, what should we expect for a tax rate to use, a base tax rate, excluding credits?

Excluding the credits?

Excluding credits.

I mean, I think if you assume t hat sort of 38% to 40%, it's probably reasonable. But those credits are out there for the next few years. I mean, there is $15 million of real cash that we save from that, so don't -- please don't ignore it. (LAUGHTER)

No, I have a way to build it in because I understand they go through 2009. Is that right?

Correct.

Okay, so yes, but the base rate is of interest as well. Then on CapEx, you mentioned spending in the quarter was 4.8 million?

Correct.

Your base rate annually is about 25 million. Is that right?

Right, maybe a little bit higher, say -- yes, about that. That's fine.

So you are under your base rate, and then some of the capital spending you expected to have in the fourth quarter, because of Australia, got rolled forward into the first quarter, but that doesn't seem to have shown up. What's happening there?

Well, I think it's more timing-related. One of the large items we have in our CapEx is actually the investment in the new Chinese joint venture. That's sort of a lump payment; that's not something that's going to roll in over a series of quarters. That investment will be made I think in two installments and it will happen later in the year. So it was naturally going to be weighted towards the second half. I think the other is just more timing on when projects starts due to weather and what not.

We have a few major projects that are actually just beginning, started (inaudible).

So for the year, 30 million to 32 million?

Yes, about 32 million.

Okay. All right. The one last, just one number. White tie inventories -- I didn't hear Walt give that number out this time.

I don't actually have the exact number, but I can tell you that it's been reduced a little bit because of (inaudible) the first-quarter sales on the size that we had, but I can also tell you, procurement continues to be quite strong out there.

I mean, we continue to see strong demand in that market.

I mean, it's the railroad, I'm sure everyone has seen, where the Class 1s are talking about (inaudible) capital of $9.4 billion this year, 800,000 more than last year, so the maintenance projects are really going full speed ahead out there.

Okay. Then on the commercial customers, the short lines and contractors, I think the question was asked, would it boosts this tax benefit? Would it boost sales? But do you think that any business was moved forward with the $7 million that fell in the quarter, or do you expect a normal pattern for the remaining three?

Obviously, some of these projects were accelerated, yes. Is that going to impact the business going forward? No.

I also think a large part of the volume we were able to capture because of our size in the market, so if this -- these products sales had been distributed over the whole year, it would have been easier for some of the smaller competitors to supply them, but because they concentrated in the first quarter, I think we feel like we actually captured some incremental volume.

Exactly.

Okay, great. Thank you, gentlemen.

Laurence Alexander, Jefferies & Company.

I just wanted to follow-up. I'm not certain if I misunderstood this, but just if you could talk on the potential for improved pricing power in creosote in the second half of this year.

In the second half of this year?

Yes, sir.

You know, I believe that's probably to be determined. I think we had some increases in creosote prices go through at the end of the year, so we are under contract for most of those volumes that would not necessarily allow a mid-year price increase.

Okay, thank you.

Thank you. At this time, there are no further questions. Mr. Turner, are there any closing remarks?

Yes, operator, thank you very much. We obviously thank all of you for participating in today's call and appreciate your continued interest in Koppers. I believe that we continue to be well-positioned for a strong 2007 and beyond, and we'll continue to see many opportunities in our core markets and continue to remain very optimistic about our future. Just to get an example of that, I think earlier this week, Alcan inked a joint venture deal in Saudi Arabia for over $7 billion that includes a 720,000-ton aluminum smelter coming online in 2011. Those kinds of things are out there for Koppers. With our continued expansions into China and obviously just normal, global operations we have out there, we continue to be very optimistic about our growth opportunities. We continue to be committed to enhancing shareholder value by executing our strategy of providing our customers with the highest quality products and services, while continuing to focus on our safety, health and environmental issues. Again, I look forward to speaking with you again in the near future. Thank you again for participating.

Thank you. This concludes today's Koppers Holdings Incorporated first-quarter 2007 results conference call. You may now disconnect.